Question 1

The following information is available for the Super Company: $$\begin{array} { l r } 
\text { Sales } & \$ 1,000,000 \
\text { Invested capital } & 312,500 \
\text { ROI } & 20 \%
\end{array}$$ The net income is _____.

Accepted Answer

The net income can be calculated using the ROI formula: ROI = Net Income / Invested Capital. Given an ROI of 20%, we can rearrange the formula to find Net Income = ROI * Invested Capital = 20% * $312,500 = $62,500.

Question 2

The following information is available for the Peter Company: $$\begin{array} { l r } 
\text { Sales } & \$ 150,000 \
\text { Invested capital } & 156,250 \
\text { ROI } & 10 \%
\end{array}$$ The return on sales is _____.

Accepted Answer

The return on sales (ROS) is calculated by dividing the net income by sales. Given the ROI (Return on Investment) of 10% and the invested capital of $156,250, we first find the net income: $ROI = \frac{Net Income}{Invested Capital}$, so $Net Income = ROI \times Invested Capital = 0.10 \times 156,250 = \$15,625$. Then, $ROS = \frac{Net Income}{Sales} = \frac{15,625}{150,000} = 0.1042$ or 10.42%.

Question 3

Identify which of the following adjustments to after-tax operating income is used to approximate cash income.

Accepted Answer

Using taxes paid rather than tax expense represents the actual amount of cash paid for taxes during the year and therefore is used to approximate cash income. The other options (expensing research and development costs, using LIFO valuation, deducting interest payable) do not directly affect cash flows and are not used to approximate cash income.

Question 4

The following information is available for the Trooper Company: $$\begin{array} { l r } 
\text { Sales } & \$ 1,000,000 \
\text { Invested capital } & 500,000 \
\text { ROI } & 10 \%
\end{array}$$ The capital turnover ratio is _____.

Accepted Answer

The capital turnover ratio is calculated by dividing sales by invested capital. For Trooper Company, this is $1,000,000 / $500,000 = 2.0000.

Question 5

In agency theory, risk is the _____.

Accepted Answer

Risk is the influence of uncontrollable factors on a manager's performance.

Question 6

The following information is available for the Fling Company: $$\begin{array} { l r } 
\text { Sales } & \$ 350,000 \
\text { Invested capital } & 156,250 \
\text { ROI } & 10 \%
\end{array}$$ The capital turnover ratio is _____.

Accepted Answer

The capital turnover ratio is calculated by dividing sales by invested capital. For Fling Company, this is $350,000 / $156,250 = 2.24.

Question 7

Identify which of the following statements about cost centers and decentralization is true.

Accepted Answer

The answer of Identify which of the following statements about...

Question 8

A firm is a good candidate for decentralization if _____.

Accepted Answer

Decentralization works well when segments operate relatively independently from one another. This allows each segment to make decisions that are tailored to their specific needs and helps to reduce bureaucracy and increase efficiency. When there is frequent transferring of products between segments or if segments buy from the same suppliers or sell to the same customers, it may indicate that the segments are not operating independently enough to benefit from decentralization.

Question 9

Decentralization may increase a firm's costs because _____.

Accepted Answer

Decentralization often involves duplicating services that were previously centralized, which can lead to increased costs. Additionally, when responsibility is spread out amongst different managers, there may be a need for increased reporting and information sharing, which can also drive up costs. Both of these factors contribute to the increased costs of decentralization.

Question 10

In agency theory, incentive is the _____.

Accepted Answer

In agency theory, incentives refer to the extent to which a manager's reward is tied to a performance measure, such as achieving certain goals or meeting certain targets. This is seen as a way to align the interests of the manager with those of the company or owner, and to motivate the manager to work towards achieving those goals.  Options A, C, and D do not accurately reflect the definition of incentive in agency theory.

Question 11

The following information is available for the Bumbling Company: $$\begin{array} { l r } 
\text { Sales } & \$ 250,000 \
\text { Invested capital } & 156,250 \
\text { ROI } & 20 \%
\end{array}$$ The net income is _____.

Accepted Answer

ROI (Return on Investment) is calculated as Net Income / Invested Capital. Given ROI is 20%, and Invested Capital is $156,250, Net Income = 0.20 * $156,250 = $31,250.

Question 12

Julio Company's after-tax operating income was $882 million.Total assets were $5,900 million and stockholder's equity was $4,050 million.Julio Company's cost of capital was 10%.Julio Company's EVA was _____.

Accepted Answer

EVA (Economic Value Added) is calculated as NOPAT - (Capital * Cost of Capital). Here, NOPAT is $882 million, Capital is Total Assets ($5,900 million), and Cost of Capital is 10%. EVA = $882 million - ($5,900 million * 10%) = $882 million - $590 million = $292 million.

Question 13

Trevor Company paid $8 million cash for research and development.EVA capital was computed as $20 million.Trevor Company cost of capital was 20%.To add economic value to the firm, Trevor Company must generate revenues less operating costs of at least _____.

Accepted Answer

To add economic value, Trevor Company must generate revenues less operating costs that cover both the cost of capital and the R&D expense. The cost of capital is 20% of $20 million, which is $4 million. Adding the $8 million R&D expense, the total is $12 million.

Question 14

Jewel Company's revenues are $300 and invested capital is $240.Expenses are currently 60% of sales.Jewel Company's current return on investment is _____.

Accepted Answer

Return on investment (ROI) is calculated as (Net Profit / Invested Capital) * 100. Net Profit is Revenue minus Expenses. Expenses are 60% of $300, which is $180. Net Profit is $300 - $180 = $120. ROI is ($120 / $240) * 100 = 50%.

Question 15

_____ is the decision?making power of segment managers.

Accepted Answer

Segment autonomy refers to the decision-making power of segment managers, giving them the ability to make decisions and take actions within their specific segment without seeking approval from higher-level managers. Goal congruence, managerial effort, and segment superiority are not directly related to the decision-making power of segment managers.

Question 16

The following information is available for the Heaven Company: $$\begin{array} { l r } 
\text { Sales } & \$ 500,000 \
\text { Invested capital } & 312,500 \
\text { ROI } & 10 \%
\end{array}$$ The return on sales is _____.

Accepted Answer

Return on Sales (ROS) is calculated as ROI divided by the turnover ratio (Sales/Invested Capital). Here, ROI is 10%, and the turnover ratio is 500,000/312,500 = 1.6. Thus, ROS = 10% / 1.6 = 6.25%.

Question 17

Identify which of the following statements is not a problem with decentralization.

Accepted Answer

This statement is actually a benefit of decentralization - reducing the costs of accumulating and processing information. The other options are all potential problems with decentralization.

Question 18

Speedo Company's revenues are $300 on invested capital of $240.Expenses are currently 70% of sales.If Angelo Company can reduce its invested capital by 20%, return on investment will be _____.

Accepted Answer

The answer of Speedo Company's revenues are $300 on invested...

Question 19

Frazier Company's revenues are $300 on invested capital of $240.Expenses are currently 84% of sales.If Frazier Company can reduce its expenses to 70% of sales, return on investment will be _____.

Accepted Answer

First, let's calculate the current return on investment (ROI) using the formula:

ROI = (Net Income / Invested Capital) x 100%

We can calculate the net income as:

Net Income = Revenues - Expenses
Net Income = $300 - ($300 x 0.84)
Net Income = $48

So, the current ROI is:

ROI = ($48 / $240) x 100%
ROI = 20%

Now, let's calculate the ROI after reducing the expenses to 70% of sales. The net income will be:

Net Income = Revenues - Expenses
Net Income = $300 - ($300 x 0.7)
Net Income = $90

So, the new ROI will be:

ROI = ($90 / $240) x 100%
ROI = 37.5%

Therefore, the answer is B. If Frazier Company can reduce its expenses to 70% of sales, the return on investment will be 37.5%.

Question 20

According to agency theory, employment contracts will trade off _____.

Accepted Answer

Agency theory suggests that employment contracts aim to balance three factors: incentive (providing motivation for agents to work hard and achieve goals), risk (managing the risks involved in the principal-agent relationship), and the cost of measuring performance (ensuring that principals are able to accurately evaluate agent performance). Option A correctly lists these three factors. Option B is incorrect because it includes "uncontrollable factors," which are not part of the agency theory framework. Option C is very close to the correct answer, but misses out on the important factor of the cost of measuring performance. Option D includes the cost-benefit tradeoff, which is not specifically mentioned in agency theory, and does not include incentive as a core factor.

Quiz 10: Management Control in Decentralized Organizations

The following information is available for the Super Company: $\begin{array} { l r } \text { Sales } & \$ 1,000,000 \\\text { Invested capital } & 312,500 \\\text { ROI } & 20 \%\end{array}$ The net income is _____.

The following information is available for the Peter Company: $\begin{array} { l r } \text { Sales } & \$ 150,000 \\\text { Invested capital } & 156,250 \\\text { ROI } & 10 \%\end{array}$ The return on sales is _____.